The U.S. Patent Overhaul Won't Help Innovators

Science Progress
On Friday, President Obama will sign the America Invents Act, resulting in the largest overhaul of the U.S. patent system in over half a century. The primary result of the legislation will be to transition America from a "first-to-invent" to a "first-to-file" country. Supporters of the new measure argue that it will streamline the patent application process and harmonize America's system with the rest of the world, and it will allow for more rapid approval and increased certainty in the validity of patents. But this misses the point entirely: the fundamental problem with current patent law has nothing to do with the process for obtaining a patent. The biggest problem is that nobody can tell what a patent covers until they've spent months or years working it out, often in the courts.

Some of the most rigorous research on U.S. patents has been conducted by Boston University's James Bessen and Michael Meurer. They have gone beyond the anecdotes that so often characterize discussions of patent reform and have studied in detail just how patents function, what incentives they create, and how the system could function better. What they found is that America's patent system only provides positive incentives for innovation in two industries: pharmaceuticals and chemicals. The value that a patent confers on its owner is outweighed by the cost of obtaining, asserting, and defending that patent for almost all American companies. Anyone innovating outside of those two industries would be better off if there were no patent system at all.

The America Invents Act reformers believe that they have fixed that issue. They haven't. The most important issue that Bessen & Meurer identify still looms large: figuring out whether what you're doing right now is covered by a patent. For almost everyone innovating in America, that problem will not be solved.

The pharmaceutical and chemical industries have largely escaped this problem because patents there share an important attribute of real property: clear boundaries. It is relatively cheap and easy to understand what a patent covers and where the boundaries of that coverage are. If I create a pill that has the same chemical compound as Merck's Gardasil, then I am infringing on their patent. If my chemical compound is not covered by a patent, then I'm in the clear.

The existence of clear boundaries is a hallmark of all effective property systems. With physical property, it is easy to understand what is mine, what is yours, what belongs to the community, and what belongs to someone else. This is why real property systems provide such good incentives for improving upon what is ours and why there is relatively little in the way of litigation to determine who has rights to a given piece of property.

Outside of chemicals and pharma, patents fail this boundary test. The last few decades have seen an explosion in abstract patents that make a mockery of our system. Software, biomedical, and business process patents result in extensive and costly litigation precisely because these patents do not function like property. Patents have emerged for concepts and ideas (like Apple's Invisible Button) and for non-specific and obvious business processes (like Amazon's One-Click Purchasing). Rather than try to more tightly define the boundaries, the filer has an incentive to make the boundaries as blurry as possible in hopes that it will be deemed broadly applicable. Even expert patent attorneys and judges have trouble discerning the scope of today's increasingly complex and abstract patents.

No property system, intellectual or otherwise, can function effectively this way. When the boundaries of what is owned are indiscernible, the concept of property ceases to have meaning. Today, large companies use patents like atomic weapons: they acquire massive patent portfolios and play a game of mutually assured destruction with their competitors. They focus not on innovation and compelling customer propositions but on creating the largest patent arsenal so that if a competitor looms large in the marketplace, they have a large legal red button to hit. And just as chilling to innovation, patent trolls have perfected the art of turning patents into a lottery. Many of these patent trolls don't produce anything, but rather scoop up patents, wait for a successful product or service to come to market, and then threaten to sue "infringers." The targets of their lawsuits are often the startups that are trying to drive real innovation in our economy, companies that rarely have the resources to fight back.

Most of the bad behavior and cost of the patent system has to do with its failure to articulate the boundaries of the intellectual property rights that it confers. Because of our patent system's inability to define the boundaries of intellectual property, it creates a negative instead of a positive incentive to innovate. The America Invents Act will fail because it is overhauling the procedures of our patent system when what is needed is an overhaul of the standards. To the extent that we can accomplish that, our patent system will become a vanguard of those who are pursuing innovation. And to the extent that we are unable to do this, we would probably be better off without any patent system at all.